Not so many years ago the phrase “panic attack" was a colloquial joke and anyone feeling a bit blue kept it to themselves. But these days, thanks to the efforts of a suite of public figures, anxiety and depression are not just recognised clinical entities, but conditions that can much more readily be revealed publicly.

There has been a price to pay for this new candour. Not only are people more prepared to admit to anxiety and depression but, much to the insurance industry’s horror, sufferers are also prepared to claim for it should they feel unable to work as a result.

Actors
Garry McDonald
and Stephen Fry, former politicians
John Brogden
and
Nick Sherry
, and Trade and Investment Minister
Andrew Robb
have all revealed, often in excruciating detail, the depth of their ­suffering.

In so doing, they have achieved something probably no charity, however well funded or intentioned, could have done in terms of raising awareness about mental illness. Their message is: it’s not unusual, you are not abnormal and you can, of course, return to working life.

One very prominent Australian corporation, AMP, understands the cost of this greater understanding of mental health only too well.

As it turns out, John Brogden now ­represents the Financial Services Council, the body that is grappling with a really big problem. Life insurance, once a nice little earner, has turned into a sector that in Brogden’s words is facing a “perfect storm".

In addition to being buffeted by rising mental health claims, individuals are ­cancelling their policies as pressure on household budgets mount and Australia’s idiosyncratic pricing model takes its toll on older policyholders. Policies are arguably too loosely worded, allowing individuals to make back-dated claims.

How we got here

Are we suffering more from mental illness? Why did the insurance industry not detect the trend earlier and do something about it? Why hasn’t it raised premium prices or changed the wording of policies?

In answer to the first question, the chief executive of the anti-depression group beyondblue,
Kate Carnell
, says categorically: yes. She points to a study which shows anxiety-related disorders have surged 40 per cent over the past six years.

One ­theory is that advances in technology, which have prompted around-the-clock use of email and social media, longer working hours and the casualisation of the workforce, have led to permanently elevated stress levels.

“Human beings are not equipped to manage consistent low or high level stress," says Carnell. Physiologically, we are designed to cope with short, sharp periods of stress.

When economic uncertainty and the threat of unemployment are added to this already heady cocktail, it is little wonder that workers are more stressed than ever.

The beyondblue boss also argues that while there is greater community awareness of mental illness, many individuals – particularly men – still fear being open about symptoms of mental illnesses, opting for the “pull up your socks" path to recovery.

“People are not getting help early. Their condition worsens and they end up presenting severe symptoms and making a claim. That is where the greater awareness comes in," says Carnell.

A senior executive in the industry ­confirmed the phenomenon.

“People are not embarrassed to claim mental health," he says.

Companies, adds Carnell, should be paying the same amount of attention to creating a “mental health-friendly" workplace as they do to ergonomic issues – and they are not.

Mortality versus morbidity

But where has the industry been while claims have been rising? Part of the problem is that naturally cautious actuaries like to have long-term data before they are prepared to start identifying trends. Traditionally, actuaries have focused on mortality rates, which tend to be stable.

However, morbidity rates, which chart the incidence of a disease, are less stable and are tied to claims against income protection and permanent disability policies.

“Actuaries have historically taken a long-term view because mortality rates are very stable. In contrast, morbidity rates tend to be more volatile and need to be dealt with appropriately," says
Simon Swanson
, chief executive of wealth firm ClearView.

Jim Minto
, chief executive of TAL, Australia’s second largest life insurer behind AMP, estimates that claims against income protection and total and permanent disability (TPD) policies are increasing by up to 15 per cent a year, and have been for the past three years at least.

That much of this is due to a rise in mental health-related claims is the industry’s worst nightmare.

A survey conducted in 2008-09 found that 8 per cent of all claims were related to mental illness, but the cost of servicing those cases was 18 per cent of the total. The average duration of a mental health-related claim was 30 months, double that of cancer.

The problem for insurers is that ­stress-related illnesses tend to affect highly paid, white collar workers, who are often off work for long periods. Insurers may be becoming increasingly sophisticated at helping the sick get back to the office and off their claims books, but even small delays can be costly when the salary in question is high.

Some individuals who left the workforce temporarily during the global financial crisis are finding their jobs no longer exist, so are calling on their policies for longer.

Then there are the lawyers. After changes were introduced to lump-sum benefits allowable under workers’ compensation in June last year, fee-hungry lawyers are ­transferring their attention – and considerable skills – to the life insurance sector, where payouts can amount to many thousands of dollars.

It is nice work if you can get it. The lawyers, usually working on a no-win, no-fee basis, pocket a decent cut of any payout and they are prepared to advertise on television and even call workplaces in their search for potential clients who might not be aware they are able to make an insurance claim.

They are finding individuals who, due to illness or injury, have not worked for many years or who may only be able to work part-time and making claims on their behalf.

In some cases, the injuries are five or 10 years old, but unlike in other countries, there is usually no minimum time frame for making claims under Australian policies.

The practice is creating havoc for insurers’ bottom lines. Anecdotal evidence suggests that for some insurers, up to 40 per cent of new claims are coming via the legal profession.

Even without a lawyer in tow, the surge in the amount of assets in superannuation means consumers are becoming increasingly aware of their retirement accounts and the fact they have life insurance policies included in super – and that those policies are potentially highly valuable.

A sorry state

On the other side of the ledger, more households are cancelling policies. Australia has a rare pricing model. In order to encourage younger people to take out insurance, premiums in the early years are cheap, but ratchet up in later years. Add in inflation-related increases, and annual premium rises can reach 7 per cent and 8 per cent, hardly an attractive proposition for older, budget-conscious consumers. Furthermore, as the population ages, demand for life cover drops. The overriding concern for older consumers shifts from getting injured or dying young, to protecting themselves from outliving their savings.

It is little wonder that Brogden uses terms such as “perfect storm" to describe its sorry state. But by some accounts, the industry has been slow to react.

“The industry is in denial that it has a long-term problem," says senior executive.

“The industry has a long way to go to ensure it has got sustainable pricing. Until that happens, it has got a problem," adds ClearView’s Swanson.

Insurers who provide life cover through the super system have started to raise premium prices by up to 50 per cent, but some think even that is not sufficient. Premiums need to jump by between 60 per cent and 80 per cent, says one expert.

In the universe of individual policies, the road to recovery is even less clear. Individual policies cannot be repriced.

The small print can’t be changed when a customer suffers from a tumour or breaks their leg in five places. A motor insurance policyholder faces a premium rise if they crash the car and put in a claim, but not so the holder of a life insurance policy.

Unfortunately for the industry, there could be even more trouble ahead.

The Mental Health Council of Australia is spearheading a project to give free legal advice to sufferers of mental illnesses who allege they have been discriminated against by insurance companies. The project started a year ago and chief executive
Frank Quinlan
says “quite a few people" have come forward already. Some cases could go before the Human Rights and Equal Opportunity Commission. Others could end up in court.

Then there is the issue of new mental illness definitions and criteria which are expected to lower the barrier to lodge insurance claims. New criteria could fuel an influx of healthy individuals being diagnosed with medical conditions and make them eligible for insurance claims.

Moves in the super industry to create fewer, bigger retirement accounts could also lead to a rise in claims, say some.